In his widely-read book Competitive Advantage (Porter, 1985[1]) Michael Porter argues that businesses must focus on areas of capability where they have a distinct advantage relative to their competitors in their target markets. They need to concentrate on one type of competitive advantage to achieve a distinct position in that market. Trying to be all things to all people will not generate successes.

There are two dimensions along which strategies can be defined: the source of the competitive advantage (low cost or product differentiation), and the scope of the advantage (narrow or broad). Crossing the dimensions gives us four business strategies, written below in PAEI order:

A Cost Focus strategy tends to emerge as a competitive move, sometimes to undercut a specific competitor. A smaller firm can also gain entry to a market by competing on cost within a specific niche. If the industry depends on economies of scale, Cost Focus opportunities are unlikely to open up.

Cost Leadership is the strategy that most depends on economies of scale. Cost Leadership requires a company to develop economies right across the organization, to consistently reduce costs across their entire produce line.

A Differentiation Focus becomes suitable when product is more highly priced, but deemed to be worth it. The product differs from competitive offerings in various ways, and this better meets the needs of certain customers in the target segment, emphasizing qualities along dimensions or attributes the target segment considers important. The vision of a better alternative is marketed.

A broader Differentiation strategy accomplishes these same differentiating tasks for all of the offerings of a company, essentially building an identity that can be trusted to deliver certain key differentiators in everything they put on the market.

Porter’s schema has some similarities with Uriel Foa’s Resource Theory (Foa, 1993[2]). Resource Theory postulates dimensions of high or low concreteness, and high or low particularism. In Porter’s two narrow-scope categories, the competitive advantage of cost focus would be concrete, and differentiation focus would be more symbolic and less concrete. In the broad-scope categories, differentiation would be more highly particularized, involving brand identity, the customer experience and other forms of relating to the customer. Cost leadership would be a much more universal appeal that would not require customers to know anything about the company behind the product. Resource Theory could be applied to business strategy to help elaborate how these four different strategies operate.